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Portions of the Fair Pay and Safe Workplaces regulations, specifically those related to reporting violations of labor laws and restricting mandatory arbitration, have been enjoined on a nationwide basis by the District Court for the Eastern District of Texas (“District Court”). The paycheck transparency provisions were upheld by the District Court and remain enforceable. Following the District Court’s Order, on October 25, 2016, federal executive agencies issued guidance to their senior procurement officials to halt implementation of the Fair Pay and Safe Workplaces regulations enjoined by the Court, and confirmed that the paycheck transparency provisions (FAR 52.2005, 22.2007(d) and clause 52.222-60) remain in effect.

As reported, the government is still weighing whether to appeal the injunction. Although it seems likely that the government will appeal the District Court’s order and argue that the District Court does not have the authority to issue the injunction on a nationwide basis, it remains uncertain whether the government could actually obtain this relief. When faced with a similar TX federal district court nationwide injunction of executive action and regulation in the context of immigration, the U.S. Court of Appeals for the Fifth Circuit upheld the district court’s authority to issue that nationwide injunction. On review, the Supreme Court split 4-4, leaving the Fifth Circuit’s decision in place. Effectively, this means that TX federal district courts and the Fifth Circuit can stall the administration’s desired policies on a nationwide basis until the Supreme Court acquires another Justice. Because we are in an election year and do not know the identity of the next Supreme Court Justice or when that Justice would be confirmed, the ultimate outcome of this injunction remains elusive at this time. However, even with some legal uncertainty, we anticipate that most government contractors would prefer to forego all but the paycheck transparency requirements until there is a greater likelihood that the enjoined regulations will be upheld than exist at this time. Indeed, even beyond the strength of the substantive arguments, the District Court briefing and oral argument made clear that had the regulations had gone into effect, the government was not yet ready to accept any reports of purported “violations” because the electronic portal to receive such data was not yet complete.

Background and Full Summary of Order

President Obama issued the Fair Pay and Safe Workplaces Executive Order (13673) (the “Order”) in July 2014. The Order established three mandates that were to be implemented by the Federal Acquisition Regulatory Council (the “FAR Council”) and the Department of Labor (“DOL”): (1) reporting labor law “violations” under fourteen different federal employment and labor laws; (2) restricting the use of mandatory arbitration provisions; and (3) establishing paycheck transparency through wage statement and notice requirements. The FAR Council issued a final set of rules and the DOL issued final guidance implementing the Order on August 25, 2016.

In early October 2016, industry trade groups sued for injunctive relief before the District Court for the Eastern District of Texas (“District Court”), to prevent the FAR Council and DOL from implementing and enforcing their final rules and guidance. On October 24, 2016, the Court granted the injunction in part, enjoining on a nationwide basis enforcement of two aspects of the regulations: the “Reporting Regulations” and the “Arbitration Regulations,” summarized at greater length below. The Court upheld the “Paycheck Transparency Regulations,” which will go into effect on January 1, 2017.

The bulk of the District Court’s analysis addresses the plaintiffs’ challenge to the Reporting Regulations. Applying the traditional standard of review for the issuance of a preliminary injunction, the District Court initially determined that plaintiffs had a substantial likelihood of success on the merits that the Reporting Regulations were unlawful—and, more importantly, the District Court described that plaintiffs had attacked the Reporting Regulations on “multiple independent grounds, each of which is sufficient to render these government actions void and unenforceable.” Slip Op at 12.

First, the District Court found that the Reporting Regulations likely unambiguously exceed the FAR Council’s and Department of Labor’s authority and are otherwise inconsistent with federal labor laws. Specifically, the District Court described that “the [Challenged Regulations] arrogate to contracting agencies the authority to require contractors to report for public disclosure mere allegations of labor law violations, and then to disqualify or require contractors to enter into premature labor compliance agreements based on their alleged violations of such laws in order to obtain or retain federal contracts. By these actions, the Executive Branch appears to have departed from Congress’s explicit instructions dictating how violations of the labor law statutes are to be addressed.” Slip Op. at 14. The District Court analyzed the NLRA and the other labor laws and found that they could not be so interpreted. See Slip Op at. 12-17.

Second, the District Court found that the Reporting Regulations likely violate the First Amendment restrictions on compelled speech (the “Compelled Speech Argument”). “That is so because the [Reporting Regulations] impose an immediate disclosure requirement that obligates federal contractors . . . for the first time to report for public disclosure any ‘violations’ . . . regardless of whether such alleged violations occurred while performing government contracts, and without regard to whether such violations have been finally adjudicated after a hearing or settled without a hearing, or even occurred at all.” Slip Op. at 17. The District Court described that these requirements were “[f]ar from being narrowly tailored.” Slip Op. at 18. Instead, the Reporting Regulations “compel government contractors to ‘publicly condemn themselves by stating that they have violated one or more labor or employment laws. The reports must be filed with regard to merely alleged violations, which the contractor may be vigorously contesting or instead has chosen to settle without an admission of guilt, and, therefore, without a hearing or final adjudication.” Slip Op. at 19-20. The District Court rejected the government’s argument that these disclosures covered only “non-controversial, factual information” and further found that the government had failed to substantiate that these public disclosures would in any way advance the government’s interest in promoting performance of government contracts. See Slip Op. at 20-21.

Third, the District Court found that the Reporting Regulations likely violate the due process rights of government contractors (the “Due Process Argument”). “The FAR Rule likely violates the due process rights of Plaintiffs’ government contractor members by compelling them to report and defend against non-final agency allegations of labor law violations without being entitled to a hearing at which to contest such allegations.” Slip Op. at 22. That is so, because a government contractor that reports a violation may suffer a business or reputational injury—even where the violation is simply an alleged violation, and the contractor is later vindicated, but where the injury “cannot be undone.” Slip Op. at 24.

Fourth, the District Court found that the Reporting Regulations are likely arbitrary and capricious, and therefore unlawful, under the Administrative Procedure Act (the “Arbitrary and Capricious Argument”), in two respects. First, the requirements are likely to bog down the “already overloaded procurement process” and otherwise “lead to delays and arbitrary and inconsistent results in the assessment of contractor responsibility to the detriment of the procurement system.” Slip Op at 24-25. The District Court described that government agency contracting officers cannot be expected to reach timely, meaningful evaluations of reported violations as required by the Reporting Regulations. Second, the District Court separately found that the Reporting Regulations are likely to impose substantial costs without quantifiable benefits.

The District Court held that the Arbitration Regulations are also unlawful because the Federal Arbitration Act (“FAA”) contains a strong preference in favor of arbitration provisions. Slip Op. at 27. Under settled Supreme Court doctrine, the District Court found that there was no congressional command to override the FAA in this instance, as compared to Congress’ express curtailing of the FAA upon enactment the Franken Amendment, which restricts certain mandatory arbitration provisions in the context of DoD’s contracts. Slip Op. at 27-28.

Remaining Issues

The District Court concluded that the other factors that must be considered likewise augured in favor of issuing an injunction. Plaintiffs were likely to suffer irreparable harm in the absence of an injunction, including First and Fifth Amendment injuries. In contrast, Defendants were unlikely to suffer any harm from the issuance of an injunction, which would merely preserve the status quo. The District Court also found that the injunction would be in the public interest by preventing the Executive Branch from acting in a manner contrary to law. See Slip Op. at 29-31.

The District Court did not find, however, that “Plaintiffs ha[d] established a substantial likelihood of success on their claims regarding” another aspect of the Challenged Regulations—the “Paycheck Transparency Requirement”—and likewise had failed to establish that “they will suffer irreparable harm as to the implementation of those provisions. Slip Op. at 31. Accordingly, the District Court did not enjoin implementation of those regulations.

Nationwide Application and Subsequent Agency Confirmation

Finally, with respect to the scope of relief, the District Court determined that it was appropriate to enjoin the Reporting Requirements and the Arbitration Requirements “on a nationwide basis.” Slip Op. at 32 (emphasis added). The plaintiff industry groups were well aware of the advantages of seeking to block the administration’s Order and implementing regulations in Texas. With appeals going to the U.S. Court of Appeals for the Fifth Circuit, widely considered be the most conservative federal appeals court in the country, and the Supreme Court split 4-4 on this issue, the federal government may not be able to obtain a stay of any injunction, leaving the district court and 5th Circuit rulings in place.

On October 25, 2016, federal executive agencies halted implementation of the Fair Pay and Safe Workplaces regulations that would have required reporting of labor law violations and placed restrictions on mandatory arbitration that had been enjoined by a Texas federal district court the day before. Agency leadership in OFPP, DoD, GSA, and NASA advised their senior procurement officials that “agencies are hereby directed to take all steps necessary with their workforces to comply with the Court Order and ensure the enjoined sections, provisions, and clauses of FAR Case 2014-025 are not implemented unless and until receiving further direction.” The guidance confirms that only the paycheck transparency provisions remain in effect (FAR 52.2005, 22.2007(d) and clause 52.222-60).

To be compliant with the Court Order, agencies received the following instructions:

Ensure new solicitations do not include representations or clauses that the enjoined coverage of the rule would have required – i.e., the representation at 52.222-57 and its commercial items version at paragraph(s) of 52.212-3, and 52.222-58 and the clause at 52.222-59, to direct disclosure of labor law violation decisions by offerors or contractors, or clause 52.222-61, that would require an offeror or contractor to agree to restrict use of mandatory pre-dispute arbitration agreements.

If a solicitation has been issued with representations or clauses listed in paragraph 1, amend those solicitations immediately to remove those representations and clauses. Additionally, agencies shall not take any action on information, if any, submitted in response to those representations and clauses.

Ensure contracting officers do not implement the procedures in 22.2002-2, 22.2002-3, 22.2002-4 or associated changes in FAR Parts 9 and 42.

GSA has also halted actions to release the changes for the System for Award Management (SAM) to support bidder and contractor submission of information on labor law decisions.

Agencies were directed to share the guidance widely among their workforces to ensure full awareness of and compliance with the Court Order. Although the guidance makes it less likely that any of the enjoined FAR clauses would appear in new solicitations or contracts, contractors would be wise to conduct their own review as well to ensure the defunct clauses are not inadvertently included.

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A copy of the opinion is available here. A copy of the agency memorandum is available here.

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